Mark Cuban and His OWS White Lie

Jeff  Carter
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Posted: Oct 17, 2011 12:01 AM

Mark Cuban has shared his opinons on Occupy Wall Street. I empathize with them, but Mr. Cuban and I have very different opinions on the movement.

I like Cuban’s public persona. He is obviously smart, is unafraid of risk and has been wildly successful. I have never met him.

Wall Street doesn’t shoot straight with the public. Investment bankers are salesman. Do you think a car salesman shoots straight with you when you go into the showroom? Why do you think an investment advisor that makes money selling you financial products is going to be any different? “Buyer beware” holds true no matter what you are buying.

In order to be a successful CEO of a company, you have to know how to sell. It’s one of my basic requirements if I am going to invest in a start up. Some CEO’s are great salesman, and it’s reflected in the companies stock price. Warren Buffett is a tremendous sales person. How much value he himself by force of personality adds to the stock price we won’t know until after he is gone. Apple’s ($AAPL) Steve Jobs was a great salesperson too. It will take some time for the dust to settle to see how much of a dollar effect his loss figures into the stock price. One of the reasons that Apple doesn’t mind articles pushing the fact that “Jobs still has products in the pipeline” is because they want to Jobs effect to be priced into their stock.

Cuban says, “Great CEO White Lie = “We are acting in the best interests of shareholders.””.

It is a great white lie depending. CEO’s also act in the best interest of management, which doesn’t always align with the best interests of shareholders. If the economic interests of shareholders and CEO compensation are aligned correctly-everyone benefits. That’s generally where the problem is found.

I don’t pay too much attention to the actual salary of the CEO and top management. I pay more attention to the type of asset they are being paid to manage, and how much risk the shareholders have at stake. The CEO of Boeing ($BA) ought to be paid more than the CEO of Kellogg ($K). Boeing has a market cap of 47 billion, Kellogg 19 billion. Steve Kaplan did some excellent numbers driven research on CEO pay. I always find numbers, rather than opinion and conjecture are better determinants of things.

So Cuban is correct on some level. CEO’s of poorly performing companies often hide behind the “best interest” statement.

Financial institutions used to be partnerships. In the late 1990's, after the repeal of Glass-Steagall they became publicly listed companies. The banks went from playing with the partners and private investors money, to the public’s money. Big difference in risk tolerance and management. Dodd-Frank missed the mark badly in its attempt to re-regulate.

If you look at top line revenue over the past ten years, proprietary trading at banks is an ever increasing part of it. There are two ways to put the genie back into the bottle. One, force banks to become partnerships. This is probably a bad idea. We have come too far to force this, and it would be too disruptive to every facet of the financial system. Two, force banks to separate themselves based on economic reasons. Banks shouldn’t be able to internalize order flow, pay for order flow, or prop trade. The prop trading arms are hedge funds. Let them compete as hedge funds. The investment banking and capital raising side of banks could remain public. The public has an economic interest in seeing that this part of banking remain healthy. If a hedge fund goes broke, who cares?

Cuban wades into student loans. This is a half-assed analysis of the situation. The problem isn’t the loans. The problem is the cost of the education combined with the earning potential of the graduate upon attaining a degree. There is a lot of variation in all the moving parts. Fixing higher education isn’t easy.

Education has larded on a lot of fixed costs because of government subsidies. Meanwhile, increased worldwide demand along with data showing college grads do better has driven up prices. Getting government out of education will do more to bring market competition and transparency to the process than a law limiting college debt.

Cuban calls for a transaction tax. This is silly. It’s pure misunderstanding of the market mechanism. HFT and black boxes are not the problem per se. The problem is the current market structure. Flatter horizontal marketplaces that are transparent will change the outcome for Main Street.

Cuban talks about executive compensation and layoffs. One of the reasons for the layoffs is we can do more with technology today than we could yesterday. Employees are productive. Many of the layoffs in the financial sector are because it was bloated to begin with. This seems like an Obama/ATM moment for Cuban. Executive compensation doesn’t seem like the reason for layoffs to me. Poor decisions by executives might be a problem, and in many cases really bad government regulation is the problem. The Oil industry would be adding people if government wasn’t over regulating it.

Cuban attacks CEO pay and I think he is correct that shareholders don’t have much of a voice in company operations. In many cases, they shouldn’t. I might invest in Ford because I like their balance sheet, believe in their future, but I don’t know much about the day to day operations of the car business. A good investor invests in good management.

But I am empathetic to shareholder rights. It’s good to remember though that in a lot of cases, the US government either regulated or forced things to happen that in the short term kept poorly running organizations afloat. How’s that GM IPO doing?
General Motors Company Stock Chart

General Motors Company Stock Chart by YCharts

Many of the banks were forced to merge or take on ships that were sinking. Then they were hit with the dual barrels of Dodd-Frank and Presidential rhetoric.

No one has been worse for this economy than the Obama administration and the Democratic plans for it.

No one.


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